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Precautionary Savings, LifeCycle and Macroeconomics

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  • Pierre-Olivier Gourinchas

    (Princeton University)

Abstract

This paper explores the implications of precautionary saving and life cycle behavior for business cycle fluctuations. Existing heterogenous agent models of the business cycle, with labor income uncertainty and incomplete markets, yield aggregate quantitative predictions that are almost indistinguishable from their representative agent counterpart. This 'quasi' aggregation theorem arises when idiosyncratic shocks are largely transitory. This paper revisits these results in the context of an overlapping generations model with two sources of heterogeneity: age and idiosyncratic shocks to labor income. Surprisingly, even with permanent labor income shocks and finite lives, the previous results are shown to hold: aggregate dynamics are fully characterized by the evolution of the aggregate capital stock. The implications for welfare and risk sharing are derived.

Suggested Citation

  • Pierre-Olivier Gourinchas, 2000. "Precautionary Savings, LifeCycle and Macroeconomics," Econometric Society World Congress 2000 Contributed Papers 0793, Econometric Society.
    • Handle: RePEc:ecm:wc2000:0793
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    Cited by:

    1. Turnovsky, Stephen J. & Bianconi, Marcelo, 2005. "Welfare Gains From Stabilization In A Stochastically Growing Economy With Idiosyncratic Shocks And Flexible Labor Supply," Macroeconomic Dynamics, Cambridge University Press, vol. 9(3), pages 321-357, June.
    2. Aoki, Kosuke & Proudman, James & Vlieghe, Gertjan, 2004. "House prices, consumption, and monetary policy: a financial accelerator approach," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 414-435, October.
    3. Bruce Preston & Mauro Roca, 2007. "Incomplete Markets, Heterogeneity and Macroeconomic Dynamics," NBER Working Papers 13260, National Bureau of Economic Research, Inc.
    4. Jonathan A. Parker & Bruce Preston, 2005. "Precautionary Saving and Consumption Fluctuations," American Economic Review, American Economic Association, vol. 95(4), pages 1119-1143, September.
    5. Krueger, Dirk & Kubler, Felix, 2004. "Computing equilibrium in OLG models with stochastic production," Journal of Economic Dynamics and Control, Elsevier, vol. 28(7), pages 1411-1436, April.
    6. Silos, Pedro, 2007. "Housing, portfolio choice and the macroeconomy," Journal of Economic Dynamics and Control, Elsevier, vol. 31(8), pages 2774-2801, August.
    7. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," American Economic Review, American Economic Association, vol. 91(2), pages 406-412, May.
    8. Miao, Jianjun, 2006. "Competitive equilibria of economies with a continuum of consumers and aggregate shocks," Journal of Economic Theory, Elsevier, vol. 128(1), pages 274-298, May.
    9. repec:pri:wwseco:dp227 is not listed on IDEAS
    10. Ricardo M. Sousa, 2007. "Expectations, Shocks, and Asset Returns," NIPE Working Papers 29/2007, NIPE - Universidade do Minho.
    11. Kosuke Aoki & James Proudman & Gertjan Vlieghe, 2002. "Houses as collateral: has the link between house prices and consumption in the U.K. changed?," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 163-177.

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